The Price Impacts of Open Market Repurchase Trades

Authors

William J. McNally,

The first and second authors are at the Clarica Financial Services Research Centre, School of Business and Economics, Wilfrid Laurier University. The third author is a Professor Emiritus at the Department of Accounting and Finance, Brock University.

Brian F. Smith,

The first and second authors are at the Clarica Financial Services Research Centre, School of Business and Economics, Wilfrid Laurier University. The third author is a Professor Emiritus at the Department of Accounting and Finance, Brock University.

Thomas Barnes

Corresponding author

The first and second authors are at the Clarica Financial Services Research Centre, School of Business and Economics, Wilfrid Laurier University. The third author is a Professor Emiritus at the Department of Accounting and Finance, Brock University.

They acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. They appreciate the skillful guidance of the anonymous referee and editors of the journal, as well as the insights of Jim Mountain, head of institutional trading at Scotia Capital and participants at the Northern Finance Association meetings, and seminars at Concordia University, McMaster University, the University of Toronto, the University of Victoria, the University of Waterloo and York University. The authors also thank Catherine Hartung, Danielle Knox, Ron Leisti and James Sandhu for research assistance. The usual disclaimer applies.

Abstract

Abstract: This paper analyzes a database of 60,000+ individual repurchase trades from the Toronto Stock Exchange. The average intraday price impact of repurchase trades is negative, since, because of execution rules, 60% are seller-initiated. Prices fall less following repurchase than matched non-repurchase trades—there is an abnormal price impact. We find evidence consistent with two hypotheses: repurchases provide price support, and the market learns that the shares are undervalued. Consistent with the latter, we find that repurchasing companies have superior timing. Share prices show abnormal losses (gains) before (after) the repurchase trades. We find no significant market reaction to the mandatory public disclosure of the trade details.